AN INDIAN ODYSSEY…

RESEARCH
&
INITIATING COVERAGE
AN INDIAN ODYSSEY…
RESEARCH
Contents
Investment Rationale ........................................................................................... 2
Investment Risk ........................................................................................... 5
Valuation & Recommendation ....................................................................................... 6
Mahindra & Mahindra Group Structure ......................................................................... 8
Business Analysis ........................................................................................... 9
International Operations ......................................................................................... 28
Subsidiaries ......................................................................................... 31
Systech (Auto Components segment) ....................................................................... 31
Mahindra & Mahindra Financial Services Limited (MMFSL) ....................................... 34
Infrastructure Development Sector ............................................................................. 35
Tech Mahindra ......................................................................................... 38
Financials ......................................................................................... 40
Initiating Coverage
Sector: Automobiles
BSE Sensex: 15,398
RESEARCH
BUY
MAHINDRA & MAHINDRA CMP Rs813
TP Rs1,013
04 Sep 2009
AN INDIAN ODYSSEY...
Vineet Hetamasaria, CFA +91-22-6618 6388
Mahindra and Mahindra (M&M) after consolidating its
vineet.hetamasaria@pinc.co.in
dominance in the India tractors market and Utility vehicles
segment is now pursuing growth in the other verticals of the Nikhil Deshpande +91-22-6618 6339
Indian automotive industry. At the group level, the company nikhil.deshpande@pinc.co.in
is aggressive in growing its business through a mix of organic
and inorganic options.
Core business on a strong footing
M&M has consolidated its leadership in the tractors market with STOCK DATA
acquisition of Punjab Tractors. In the utility vehicles segment too, Market Cap Rs221.6bn.
it has extended its leadership position with a market share of ~57%. Book Value per share Rs204
Eq Shares O/S (F.V. Rs1) 272mn.
Foraying in 2-wheelers and Heavy Commercial vehicles Free Float 69.2%
Avg Traded Value (6 mnths) Rs786mn
M&M has now forayed in 2-wheelers segment through acquisition
Initiating Coverage
52 week High/Low Rs943/236
of assets of Kinetic Motors. Through its joint venture with Navistar, Bloomberg Code MM IN
Reuters Code MAHM.BO
M&M will be launching Medium and Heavy commercial vehicles
(MHCV) in H2FY10.
Subsidiaries increasing their value for the parent
TOP SHAREHOLDERS
M&M is engaged in various other businesses like Information
Name % holding
Technology, Financial Services, Automotive Components,
Life Insurance Corporation of India 17.30
Hospitality, Real Estate etc. These businesses are growing at an
ICICI Prudential Life 2.19
accelerated pace thus increasing their contribution to M&M profits.
First State Investment 1.90
Initiate coverage with Buy rating HSBC Global Investment 1.83
We initiate coverage on the company with a ‘BUY’ recommendation General Insurance Corporation 1.81
and a price target of Rs1,013. For arriving at target price, we have
considered Sum of the Parts (SOTP) valuation methodology. We
have discounted FY10 core earnings 14x and taken a discount of PERFORMANCE (%)
20% for subsidiaries valuation. 1M 3M 12M
Absolute (12.2) 17.9 38.5
KEY FINANCIALS (STANDALONE) Rs mn Relative (9.4) 15.3 36.2
FY07 FY08 FY09 FY10E FY11E
Net Sales 96,277 108,046 126,491 145,416 160,677
YoY Gr.(%) 20.5 12.2 17.1 15.0 10.5 RELATIVE PERFORMANCE
Op. Profits 8,447 6,391 6,476 14,916 16,707
M&M BSE (Rebased)
Op. Marg.(%) 12.0 11.9 8.3 13.1 13.1 1,000
Adjusted Net Profit 9,947 9,382 8,287 13,982 15,284
YoY Gr.(%) 47.7 (5.7) (11.7) 68.7 9.3 800
KEY RATIOS
600
Dil. EPS (Rs) 42.2 39.3 32.4 50.4 53.3
ROCE (%) 28.6 21.3 13.8 18.5 17.6 400
RoE (%) 31.0 23.8 17.3 23.0 20.0
PER (x) 19.3 20.7 25.1 16.1 15.3 200
EV/Net sales (x) 2.3 2.2 1.9 1.7 1.6 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09
EV/EBDITA (x) 18.8 17.4 22.6 12.6 11.7
PINC Research reports are also available on Reuters, Thomson Publishers and Bloomberg PINV <GO> 1
RESEARCH
Mahindra & Mahindra
INVESTMENT RATIONALE
Investment Rationale
Growth in H1FY10 to Marginal impact of deficient monsoons on tractor sales: Due to full impact of merger
neutralise the decline in of Punjab Tractors (PTL), tractor volumes are likely to increase by 13% to 135k units in
H2FY10... FY10. On a comparable basis, this growth is 3%. YTDFY10 the company has achieved a
14% growth in tractor sales, however given the deficient monsoons during the current year
we expect sales to be adversely impacted in H2FY10 leading to 2% decline in sales. We
expect monsoon impact to be muted during the current year as tractor sales over the last
two years were subdued.
Exhibit 1 - Tractor Sales
PTL M&M Industry M&M grow th Industry grow th
400 45
300 30
200 15
100 0
0 (15)
FY05 FY06 FY07 FY08 FY09 FY10E FY11E
Source: Company, TMA
Non-tractor revenues to Developing non-tractor revenue streams: Over the last three years, farm equipment
increase further... segment (FES) is reducing its dependence over tractors by targeting non-tractor revenue
streams. Non-tractor revenues now contribute ~20% to the revenues of FES. In the initial
phase, company has targeted engines (Powerol) as the business area and within three
years, it has become Rs10bn business. Now, M&M is focusing on agriculture equipments
for incremental growth. Given the shortage of labor in rural economy due to National Rural
Employment Guarantee Scheme (NREGA), there is a big potential for farm equipment.
Exhibit 2 - FES Non-Tractor Segment Revenues
MM Pow erol MM Applitrac Non Tractor Business Contribution (RHS)
12,000 20
9,000 15
Rs mn
6,000 10
(%)
3,000 5
0 0
FY05 FY06 FY07 FY08 FY09
Source: Company, PINC Research
vineet.hetamasaria@pinc.co.in 2
RESEARCH
Mahindra & Mahindra
INVESTMENT RATIONALE
Strong product line-up to help Utility vehicles on a strong wicket: New offering by the company and absence of any
maintain leadership... major launches by the competition has helped M&M in consolidating its market leadership
position further in the UV category. With Scorpio doing well despite launch of Xylo, the
outlook on SUV segment remains strong. In the current year, Xylo will be the major growth
driver while in FY11, we expect Scorpio to lead the growth charts with planned launch of a
successor to existing Scorpio. Overall we expect UV sales to grow by 11% and 9% during
FY10 and FY11 respectively.
Exhibit 3 - M&M Utility Vehicle Sales
Non Scorpio Scorpio/Xy lo Grow th (%) (LHS)
200 40
150 30
100 20
50 10
0 0
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E
Source: Company
Commodity price correction Raw material cost reduction to drive profitability: During FY09, profitability of the
to lead to margin company was adversely impacted due to abnormal increase in raw material cost. The
improvement... problem was further aggravated by global financial crisis during H2FY09 leading to weak
demand conditions. With correction in raw material prices and improvement in demand
conditions, M&M is well positioned to expand its margins to FY08 levels.
Exhibit 4 - Operating Margin
EBITDA Rs mn (LHS) EBITDA Margins % (RHS)
7,000 16
5,500 12
Rs mn
(%)
4,000 8
2,500 4
1,000 0
Dec-06
Dec-07
Dec-08
Sep-06
Mar-07
Jun-07
Sep-07
Mar-08
Jun-08
Sep-08
Mar-09
Jun-09
Source: Company, PINC Research
vineet.hetamasaria@pinc.co.in 3
RESEARCH
Mahindra & Mahindra
INVESTMENT RATIONALE
Debt equity ratio comfortable Leverage levels at its peak: At present, on the standalone balance sheet, M&M has
at 0.5x... gross debt of Rs40bn. We believe that this is the peak debt level for the company considering
the announced capex and investment plans of the company. At present, net debt/equity
level stands at 0.5x and we see it improving to 0.4x in FY10. For the purpose, we have
considered conversion of compulsorily convertible debentures of Rs7bn in FY10 and FCCBs
conversion of USD190mn in FY11. This provides further scope for fund raising to the company
in case of any future growth opportunity.
Exhibit 5 - Total Debt
Gross Debt (Rs bn) Net debt equity (x )
60 0.8
45 0.6
Rs bn
30 0.4
15 0.2
0 0.0
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E
Source: Company, PINC Research
Holding treasury stock worth Treasury stocks give flexibility for fund raising: M&M has created 26mn treasury
Rs21bn... stocks on merger of two subsidiaries – Mahindra Holding & Finance and Punjab Tractors
– during FY09. At the current market price, these treasury stocks are worth ~ Rs20bn.
M&M will be monetising these stocks at an opportune time. This will be very handy to the
company in raising funds without any further equity dilution.
Subsidiaries increasing their Subsidiaries adding value to the company: The major subsidiaries of the company
importance in the group... are doing well. Tech Mahindra has acquired Satyam Computers Services and is now in the
process of stabilizing the operations. The financial arm Mahindra & Mahindra Financial
Services should benefit from improved outlook for M&M’s vehicle sales and easing liquidity
conditions. Mahindra Holidays and Resorts have successfully launched their IPO. Mahindra
Lifespace Developers is progressing on development of its Jaipur SEZ and has commenced
work on residential projects at Chennai SEZ. However, auto components business remains
in a tight spot with major part of the capacity for the company located in European markets.
Given the fact that these capacities were acquired by M&M at the peak of the cycle, it
remains an area of concern.
vineet.hetamasaria@pinc.co.in 4
RESEARCH
Mahindra & Mahindra
INVESTMENT RISKS
Investment Risks
Dependence on rural Monsoons a concern: M&M derives a major part of their sales from rural areas which is
economy is very high... dependent on the monsoons. During the current year, monsoons have been poor and are a
big concern for the agriculture. We estimate that dismal monsoons will be having marginal
impact on tractor sales as the North-west part of the country is having good irrigation facilities
thus mitigating the impact of monsoons. However, deficient monsoon can lead to lowering
of water levels and impact winter crops. This is a key risk to our growth assumptions in the
tractor segment. Even in the automobile segment, M&M has a high exposure to rural economy
and a weak performance in rural economy will adversely impact M&M sales.
Foray in the new segments in automotive segment: By acquiring assets of Kinetic
Motors, M&M has entered into 2-wheelers business. The domestic 2-wheelers business
has become very competitive with growth rate of single digits. Most of the manufacturers,
except the top two manufacturers are generating low return on their investments. Even a
company like TVS Motor with annual volumes of more than 1mn units has OPM of less
than 5%. In this environment, we see 2-wheelers to be a drag in the group performance. By
this year end, M&M will be launching its product in the Medium & Heavy commercial
vehicles (MHCV) segment. This business has remained a virtual duopoly in the domestic
market despite entry of new players. Given the fact that this segment doesn’t have any
synergy with the existing business in sales and distribution, it will be an uphill task for the
company to achieve a critical mass in this segment.
Auto components division Passenger car and auto components are a drag on consolidated financials: In the
(Systech) remains a drag on passenger cars segment, Logan sales have not matched up to the expectations after the
profitablility... initial success. The joint venture company Mahindra Renault incurred a loss of Rs5bn
during FY09 on a sales volume of 13k units. The scenario remains challenging and M&M is
waiting for response of joint venture partner Renault on the future of the JV. In the auto
components business, M&M has pursued inorganic growth opportunity and most of these
acquisitions were done at the peak of cycle. Major parts of the capacity in the acquired
entities are in Europe which is still struggling to come out from the recession. This increases
the risks for the business.
vineet.hetamasaria@pinc.co.in 5
RESEARCH
Mahindra & Mahindra
VALUATION & RECOMMENDATION
Valuation & Recommendation
Sum of the Parts Valuation
M&M being a conglomerate, we value this company on Sum of the Parts (SOTP) valuation
methodology. For the purpose, we have valued core earning of standalone entity through
earnings multiple method. For listed subsidiaries, we have taken current market price as
the reference point and given a 20% holding structure discount.
The diluted core earnings of the company is likely to increase from Rs27.2 in FY09 to
Rs48 in FY11 with a CAGR of 33%. In this interim, equity base of the company is likely to
increase by 6% due to conversion of debentures and FCCBs.
Exhibit 6 - SOTP Valuation Table
Company name Valuation Per share
Method (Rs) Multiple Value (Rs) Remarks CMP Date
Mahindra & Mahindra (Standalone) P/E 45.7 14 639 Core EPS for FY10E
Tech Mahindra CMP 186.1 0.8 149 Discount of 20% to CMP 3-Sep-09
Mahindra Holiday & Resorts CMP 85.3 0.8 68 Discount of 20% to CMP 3-Sep-09
M&M Financial Services CMP 46.3 0.8 37 Discount of 20% to CMP 3-Sep-09
Mahindra Lifespace Developers CMP 27.2 0.8 22 Discount of 20% to CMP 3-Sep-09
Mahindra & Mahindra (Treasury Stocks) CMP 77.3 0.8 62 Discount of 20% to CMP 3-Sep-09
Swaraj Engines CMP 4.5 0.8 4 Discount of 20% to CMP 3-Sep-09
Mahindra Forgings CMP 11.2 0.8 9 Discount of 20% to CMP 3-Sep-09
Mahindra Ugine Steel CMP 2.3 0.8 2 Discount of 20% to CMP 3-Sep-09
Mahindra Composites CMP 3.8 0.8 3 Discount of 20% to CMP 3-Sep-09
Mahindra Navistar P/BV 12.4 1.5 19 Book Value on 31st March 2009
SOTP Value (Rs) 1,013
Source: PINC Research
Exhibit 7 - Consolidated Financials
(Rs mn) FY09 FY10E FY11E
Mahindra & Mahindra (Standalone core profits) 6,969 12,664 13,768
Tech Mahindra* 4,954 3,163 3,578
Mahindra Holiday & Resorts 781 997 1,246
M&M Financial Services* 1,289 1,478 1,637
Mahindra Lifespace Developers* 337 371 631
Mahindra & Mahindra (Treasury Stocks) 0 259 311
Mahindra Systech Division (789) (400) 400
Mahindra Renault (2,500) (1020) (500)
Trading & Other business 3,013 3,315 3,646
Consolidated Profits 14,054 20,827 24,717
Consolidated diluted earnings (Rs) 54.9 75.1 86.2
Source: PINC Research, * Bloomberg Estimates
vineet.hetamasaria@pinc.co.in 6
RESEARCH
Mahindra & Mahindra
VALUATION & RECOMMENDATION
Exhibit 8 - Peer Comparision
EPS (Rs) P/E (x)
Company Basis
FY10 FY11 FY10 FY11
Hero Honda Standalone 98.4 108.3 15.7 14.3
Maruti Suzuki Consolidated 72.7 85.6 20.7 17.6
Ashok Leyland* Standalone 1.9 2.6 20.8 15.0
Tata Motors* Consolidated 6.1 20.5 83.0 24.9
Mahindra & Mahindra Consolidated 75.1 86.2 10.8 9.4
Source: PINC Research, * Bloomberg Estimates
Recommendation
Target Price of Rs1,013... Our SOTP valuation for the company comes at Rs1,013. On a relative basis too, M&M is
trading at cheaper valuations as compared to its peers in the Indian market. The discount
on M&M valuation is steep which we believe is unjustified given the financial strength of the
company and business strength of its operations.
Currently the stock is trading at Rs813. We initiate coverage on the stock with a ‘BUY’
recommendation with target price of Rs1,013 giving an upside of 25% from the current
level.
vineet.hetamasaria@pinc.co.in 7
RESEARCH
Mahindra & Mahindra
M&M GROUP STRUCTURE
Mahindra & Mahindra – Group Structure
Exhibit 9 - Group Structure
MAHINDRA & MAHINDRA
FARM AUTO INFRASTRUCTURE FINANCIAL
AUTOMOTIVE COMPONENTS IT SERVICES
EQUIPMENT DEVELOPMENT SERVICES
(SYSTECH)
DOMESTIC MAHINDRA MAHINDRA MAHINDRA MAHINDRA TECH
OPERATIONS TRACTORS FORGINGS HOLIDAYS & FINANCE MAHINDRA
RESORTS
MAHINDRA SWARAJ MAHINDRA MAHINDRA
MAHINDRA
RENAULT (MRPL) DIVISION (PTL) UGINE STEEL LIFESPACES
SATYAM
MAHINDRA
INFRA
DEVELOPERS
MAHINDRA MAHINDRA ENGINEERING
NAVISTAR APPLITRAC SERVICES
AUTOMOTIVES MAHINDRA
LTD (MNAL) WATER
UTILITIES LTD
MAHINDRA MAHINDRA
NAVISTAR MAHINDRA GEARS WORLD CITY
ENGINES POWEROL JAIPUR
INDEX
(MNEPL)
DIVISION
MAHINDRA
MAHINDRA MAHINDRA WORLD CITY
VEHICLES CHINA STAMPINGS
CHENNAI SUBSIDIARY
(CHAKAN SPV) TRACTORS
MAHINDRA JOINT VENTURE
MAHINDRA TWO MAHINDRA WORLD CITY
WHEELERS USA COMPOSITIES
MAHARASHTRA
CASTINGS
Source: Company
vineet.hetamasaria@pinc.co.in 8
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
Business Analysis
Automotive Segment
Utility Vehicles & Pick-up segment
Consistently maintained M&M has maintained a leadership position in the domestic utility vehicles and pick-up
marketshare in excess of space with a wide product portfolio. From assembling of jeeps in the 1950s, it has evolved
40% in UV segment... in a company with strong research and development capabilities. In its product portfolio, it
has a mix of mass market products like Bolero, Xylo to lifestyle products like Scorpio. In
the UV segment, it has consistently maintained a marketshare in excess of 40% in the
domestic markets.
Exhibit 10 - Utility Vehicles Marketshare
MM TTML TOYOTA OTHERS
50.0
37.5
25.0
(%)
12.5
0.0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: SIAM
In urban areas, growth in The UV segment in India has witnessed CAGR of 12% over FY02-09. This growth is two
BPO business is a major
pronged with contribution from both rural and urban India. In the urban segment, growth in
growth driver for UVs...
business process outsourcing (BPO) segment has been the major demand driver besides
the increased demand from commercial activity like tour operators etc. Over the last ten
years, India has emerged as a major hub for global outsourcing purpose leading to growth
in BPO centers and jobs in the country. The BPO industry provides conveyance facilities
to its employees and this has led to surge in demand of UVs from the BPO industry.
Increased economic activity has led to more movement of people and led to healthy growth
in tour operator business.
In the rural areas, UVs are used as a means of public conveyance due to their toughness.
This is important given the poor road conditions and lack of proper service infrastructure. In
the Pick-up segment also, M&M has a strong presence and again this product is targeted
on rural and semi-urban areas. M&M currently enjoys market share of over 47% in UV
segment (including pick-up).
vineet.hetamasaria@pinc.co.in 9
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
Exhibit 11 - Number of Employees in Indian IT Industry
IT Serv ices & Softw are Ex ports BPO Ex ports
Domestic Market Grow th (LHS)
2,400 32
1,800 24
.
1,200 16
%
600 8
0 0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E
Source: Nasscom
Exhibit 12 - Utility Vehicle Industry Sales
Utility Vehicle Sales Grow th (LHS)
320 30
240 20
.
160 10
80 0
0 (10)
FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: SIAM
vineet.hetamasaria@pinc.co.in 10
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
Products in Utility vehicles and Pick-up segment
Bolero – MM’s warhorse
Bolero continues to be the M&M launched the Bolero multi utility vehicle in 2000. This product has been clocking
largest selling brand in the annual volumes of 50k for the past two years and is the highest selling product in domestic
UV segment...
UV segment. This product has its variants in Pick-up and UVs.
Exhibit 13 - Bolero Sales
Bolero Marketshare
60 32.0
45 24.0
30 16.0
15 8.0
0 0.0
FY05 FY06 FY07 FY08 FY09
Source: Company, SIAM
Over the FY05-09 period Bolero sales have grown at a CAGR of 22.5%. During FY09 while
the utility vehicles domestic market contracted by 7.9% to 225k units, Bolero registered
an impressive growth of 9.6% to 56k units. In the process the model achieved a marketshare
of 24.8%, thus expanding its market share by 400bps over FY08.
Scorpio – Giving an urbane touch to the company
Scorpio transformed the With the launch of the Scorpio Sports Utility vehicle (SUV) in mid-2002, M&M demonstrated
image of the company...
its transition from predominantly a jeep manufacturer to a lifestyle vehicle maker. This
product is also instrumental in transforming the image of the company from manufacturer
of rugged vehicles to manufacturer of sophisticated products. This product has also helped
the company in changing its perception from a rural India player to a balanced player
catering to requirements of a much wider market. This product was indigenously developed
at a total capex of USD120mn, which is just a fraction compared to global standards of
USD1bn capex.
During the period FY04-08, Scorpio sales grew at a CAGR of 14.2% to peak at 40k units
in FY08, garnering a marketshare of 16.3% in the domestic UV segment. However, in
FY09 sales slumped by 24.9% due to economic slowdown and increase in excise duty on
the product. In Q4FY09, M&M launched their new product Xylo which has further led to
some cannibalization of Scorpio. The company is currently working on a new Scorpio
which is expected to be launched in FY11.
vineet.hetamasaria@pinc.co.in 11
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
Exhibit 14 - Scorpio Sales Trend
Scorpio Grow th
50 30.0
38 15.0
25 0.0
13 (15.0)
0 (30.0)
FY05 FY06 FY07 FY08 FY09
Source: Company
M&M in overdrive with Xylo
Xylo enriching the product In Jan’09 M&M launched its latest offering, the multi purpose vehicle Xylo on an entirely
offering in the UV space... new platform. Developed at a total cost of Rs5.5bn, the vehicle is being marketed as an
alternative to the sedan. Xylo is targeted towards personal as well as commercial use. The
Xylo is pitted against the Toyota Innova which is the second largest selling utility vehicle in
the country.
The excellent performance of the vehicle coupled with an aggressive pricing has helped
boost the demand for the vehicle. During the Jan’09-Apr’09 period the Xylo has clocked
sales of 10k units with total bookings exceeding 16k units. The vehicle has however
cannibalised a Scorpio sales to a small extent. M&M has also launched the Xylo in South
Africa and has received a warm response for the same.
Exhibit 15 - Xylo Monthly Sales
Innov a Scorpio Xy lo
4,800
3,600
2,400
1,200
0
Oct-08
Dec-08
Jul-08
Aug-08
Sep-08
Jan-09
Feb-09
Mar-09
Apr-09
Jun-09
Jul-09
Nov-08
May-09
Source: Company, SIAM
vineet.hetamasaria@pinc.co.in 12
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
3-wheelers Segment
Passenger Carriers
Passenger 3-wheeler industry The Indian 3-wheelers market is dominated by the passenger carriers. In this segment,
dependent on replacement Bajaj Auto is the largest player. There are two distinct segments in 3-wheelers passenger
demand... carriers industry – regulated and non-regulated. In the regulated market, state governments
decide about the number of permits to be issued and generally in this market demand is for
environment friendly products. This segment is dominated by Bajaj Auto with ~90% market
share. The non-regulated market is in tier II towns and semi-urban areas. In this market,
demand is for bigger 3-wheelers with higher passenger carrying capacity. Piaggio is the
market leader in this segment. Over the last few years, demand has been largely contributed
by non-regulated market. In the regulated market replacement demand is the mainstay for
industry as very few new permits have been issued in the last five years. This has led to
subdued CAGR of 7.8% for the industry over FY02-09. However during FY09, passenger 3-
wheelers industry has shown a growth of 15.6% amidst decline in almost all other automobile
segments. We expect growth in the segment to taper-off to a low single digit growth.
Exhibit 16 - 3-Wheelers Industry Sales
Passenger 3W Goods 3W Grow th (LHS)
480 40
360 25
Units ('000s)
240 10
120 (5)
0 (20)
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: SIAM
M&M’s offering
Till FY08 M&M was only a marginal player in the passenger 3-wheelers segment as its
portfolio had only one offering i.e. the 6-seater Champion diesel. However in Feb’09, M&M
launched the 3-seater Alfa Passenger catering a much wider market. In FY09 this segment
clocked volumes of 26k units for M&M leading to an overall market share of 10% in passenger
3-wheelers up from 1% in FY08.
vineet.hetamasaria@pinc.co.in 13
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
Exhibit 17 - Passenger 3-wheelers Marketshare Exhibit 18 - Goods 3-wheeler Marketshare
BJAUT Piaggio M&M Others BJAUT M&M Piaggio Others
60%
100%
75% 45%
50% 30%
25% 15%
0% 0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: SIAM
Goods Carriers
Tata ACE had a big impact In India, 3-Wheelers goods carriers are used as the ‘Last-mile’ connectivity in the supply
on 3-wheeler cargo chain. Demand for this segment has been adversely impacted over the last three years
segment...
due to launch of sub 1-tonne 4-wheeled Tata ACE which revolutionized the SCV (Small
commercial vehicle) space. Despite a higher price tag, the ACE found acceptance due to
the vehicle stability and flexibility in overloading. Piaggio is the market leader in this segment
with a market share of 40% followed by M&M with market share of ~25%. Both these
players have now launched products in the SCV segment; however they remain a marginal
player in this segment. M&M has two offerings in the goods 3-wheelers segment, the Alfa
and Champion models. Both the products are available in diesel and CNG variants. The
Champion has a 0.75mt payload while Alfa has a 0.5mt payload.
Exhibit 19 - Low tonnage LCV cannibalising 3-wheelers goods category
Total Goods 3W LCVs < 3.5MT
Grow th Goods 3W Grow th LCVs <3.5 MT Tata ACE launched
200 100.0
150 60.0
Units '000s
100 20.0
50 (20.0)
0 (60.0)
FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: SIAM
vineet.hetamasaria@pinc.co.in 14
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
Passenger car segment
M&M is a marginal player in M&M entered the passenger car segment through Mahindra Ford India, which started as
the passenger car an equal joint venture with Ford Motor Company, USA (Ford) in 1995. However, M&M
segment...
diluted their stake in the venture to 28% in 1998 by not subscribing to the enhanced capital
of the company. In FY05, M&M exited this venture by selling its stake to Ford.
In Sep'05, M&M announced another joint venture Mahindra Renault (MRPL) for passenger
cars with French automobile manufacturer Renault. M&M has a 51% holding in this venture.
MRPL is essentially a single product JV formed to manufacture and market Renault Logan
in India. This product is contract manufactured by M&M for the JV at its Nasik Plant and
marketed through the exclusive M&M distribution chain. The car was launched in India in
May 2007. After initial success, this product has been on a continuous decline and the
partners are in negotiations regarding the future of this venture. The fate of this venture will
be linked to Renault's India plan. Renault is constructing a passenger car plant at Chennai
in association with Nissan Motor Company. Earlier M&M was a partner in this project too,
however later on they exited this venture.
Exhibit 20 - Renault Logan Sales
Logan Sales Marketshare Midsize segment (LHS)
10,000 16
7,500 12
5,000 8
2,500 4
0 0
Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10
Source: SIAM
Commercial Vehicles
In the commercial vehicles segment, M&M is currently a marginal player with offerings in
the light commercial vehicles segment. The company classifies its Pick-ups in utility vehicles
segment. However, the auto manufacturers association classifies Pick-ups in LCVs
categories.
Light Commercial Vehicles
In the LCV segment M&M is In the LCV segment, M&M has a major presence through its Pick-ups. In the traditional
largely present through pick- LCV space, it is a marginal player with annual volumes of ~10k units. Indian LCV market
ups... has been a fast growing market with CAGR of 23% over FY02-09. However, this market has
undergone a transition with low tonnage vehicles gaining prominence. The low tonnage
vehicles segment has grown by 42% over the similar time frame. Tata Motors (TTMT) through
their low tonnage vehicle ‘Ace’ is the market leader in the LCV goods segment. M&M is
present through their pick-up range of vehicles. To participate in fast growing ‘Ace’ category,
M&M is working on a similar kind of product which is expected to hit the market by end
FY10. We believe that this segment is in secular growth trend due to emergence of hub and
vineet.hetamasaria@pinc.co.in 15
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
spoke model in the goods transportation segment. This segment caters to last mile
connectivity and with development of highways and road congestion in consumption centers,
their will be increasing demand for these vehicles.
Exhibit 21 - LCV Goods Segment Sales Exhibit 22 - LCV Passenger Segment Sales
LCV Goods ('000s) Grow th (%) (RHS) LCV Pass ('000s) Grow th (%) (RHS)
250 45 35 60
200 30 30 40
150 15 25 20
100 0 20 0
50 (15) 15 (20)
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: SIAM
Medium and Heavy Commercial vehicles
The Indian MHCV industry is a classic case of Duopoly with the top two manufacturers
namely TTMT & Ashok Leyland (AL) together enjoying ~90% market-share in both passenger
as well as the goods segment.
Passenger segment
MHCV passenger segment In the passenger segment both TTMT as well as AL each command a 45% marketshare.
to do well due to demand Over the FY03-09 period the industry sales have grown at a CAGR of 9.8% to 35k units in
from STUs... FY09. The passenger segment has been a steady segment unlike the goods segment
where there is a big volatility in the demand trend. Traditionally, this market was dependent
on state transport undertakings for demand. However, in the last few years, development on
national highways has led to increased demand from private operators. In FY09, the central
government as a part of its economic stimulus package provided capital support to STU’s
for replacement of old vehicles. This is expected to be a demand driver during the current
year. Beside this additional demand is expected from Delhi government, due to
Commonwealth games in Delhi in 2010.
M&M currently is not a participant in this market and doesn’t have any plan to move in this
segment in the near future.
vineet.hetamasaria@pinc.co.in 16
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
Exhibit 23 - MHCV Passenger Segment Sales Exhibit 24 - MHCV Pass. Segment Mkt Share
MHCV Pass ('000s) Grow th (%) (RHS) Ashok Ley land Tata Motors Others
50 45.0 60.0
40 30.0 45.0
30 15.0 30.0
20 0.0 15.0
10 (15.0) 0.0
FY04 FY05 FY06 FY07 FY08 FY09 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: SIAM
Goods segment
MHCV goods segment is a MHCV goods segment after displaying an impressive CAGR of 20% over FY03-08, declined
duopoly betwenn Tata Motors by 37% during FY09. The prime reason for the decline has been economic slowdown,
and Ashok Leyland... slump in exim trade, higher interest rates and unavailability of financing. Increase in vehicle
cost due to inflationary pressure and increase in fuel prices during This segment was
undergoing a transformation over the last few years due to development of highways. This
led to increased demand for high capacity vehicles which are cost efficient. However,
FY09 was marked by the reversal of the trend with steep decline in high tonnage vehicles.
We expect this to be temporary phase and maintain our view that MHCV segment will
move towards heavy tonnage vehicles due to their cost efficiencies.
In MHCV goods segment, TTMT is the market leader with a marketshare of ~65% while AL
has been maintaining its share in ~ 22%. Both these players have been maintaining their
market share despite entry of new players in the segment.
Exhibit 25 - MHCV Goods Segment Sales Exhibit 26 - MHCV Goods Segmentwise Sales
MHCV Goods ('000s) Grow th (%) (RHS) Ashok Ley land Tata Motors Others
300 50 80.0
225 25 60.0
150 0 40.0
75 (25) 20.0
0 (50) 0.0
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: SIAM
vineet.hetamasaria@pinc.co.in 17
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
M&M is entering into MHCV Considering the demand potential in India, global majors are attracted towards Indian MHCV
segment in JV with market. A joint venture with a local partner is a preferred method to enter the market. Swedish
Navistar...
major Volvo has tied with Eicher for its foray while MAN is operating in partnership with
Force Motors. Daimler had a JV agreement with the Hero group, however later on Hero
group pulled out of the JV.
M&M has entered into a 51% joint venture Mahindra Navistar with US based International
Truck & Engine Corp (ITEC) for the manufacture of MHCV. This JV will manufacture MHCV
at the upcoming Chakan, Pune plant of M&M. The plant with an initial capacity of 30k
vehicles will start operation in Q4FY10. The first product to be launched is a 25 MT rigid
truck.
Exhibit 27 - MHCV Goods Segmentwise Sales
ICV MDV Multiax le Tractor Trailer
300
225
Units '000s
150
75
0
FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: SIAM
Exhibit 28 - MHCV Goods Segentwise Composition
ICV MDV Multiax le Tractor Trailer
100.0
75.0
50.0
25.0
0.0
FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: SIAM
vineet.hetamasaria@pinc.co.in 18
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
2-wheelers
Entered into the business M&M is a new entrant in the 2-wheelers segment. In July 2008, M&M entered this segment
last year by buying assets of by purchasing the assets of Kinetic Motor Company (KMCL) for Rs1.1bn. For this, M&M
Kinetic Motor... has formed a joint venture Mahindra Two Wheeler Ltd in which M&M holds 80% stake. In
Jan’09, this JV re-launched two scooters namely the 125cc-Flyte & the 135cc-Nova. These
products were earlier being sold under the Kinetic brand. The products are being rolled out
from the Pithampur, MP plant. M&M has plans to launch motorcycles in the future.
2-wheelers industry structure
Indian 2-wheelers industry is dominated by motorcycles. Over the last five years, scooters
have also made a comeback as a second vehicle in a household. However, Indian 2-wheelers
industry is dominated by two players – Hero Honda and Bajaj Auto. These two manufacturers
enjoy high returns on their automotive business and this gives them ample firepower to take
on competition. We believe that M&M will be facing tough challenge from the incumbent
players and will need big investments.
Exhibit 29 - 2-wheeler Industry Sales
2-w heeler Sales (mn units) Grow th %
8.0 30.0
6.0 20.0
.
4.0 10.0
2.0 0.0
0.0 (10.0)
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: SIAM
Exhibit 30 - Scooter Segment Marketshare
HH HMSI TVSM
BJAUT Kinetic Motor OTHERS
60
45
30
15
0
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: SIAM
vineet.hetamasaria@pinc.co.in 19
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
Farm Equipment Segment
Tractors
Tractor industry had a CAGR Indian tractor industry is highly cyclical in nature being dependent on the vagaries of the
of 3% over FY00-09... monsoon. The penetration of irrigation has a high positive effect on the tractor sales. With
the increase in irrigation facilities, dependence of farmers reduce on monsoons leading to
better certainty on the output. This has a favorable impact on farmer’s decision making for
the purchase of farm equipments.
During the period FY00-09, the industry has reported a modest CAGR of 3%. At present,
the size of the domestic market is ~300k units and exports contribute another 45k units.
Exhibit 31 - Domestic Tractor Sales
Domestic Sales Agricultural GDP Grow th Tractor Grow th
400 40
300 20
200 0
100 (20)
0 (40)
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: TMA, www.mospi.nic.in
Exhibit 32 - Tractor Exports
Ex ports Grow th
60 90
45 60
30 30
15 0
0 (30)
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: TMA
vineet.hetamasaria@pinc.co.in 20
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
Tractor Penetration
Tractor penetration in India is In India there are 72mn farming households and around 70% of this household is small and
low and lopsided... marginal farmers. Out of these 72mn farming households, only 4.5mn households own
tractors and a major part of this is owned by big farmers. The overall penetration of tractors
in India is 11 tractors per 1000 acres of area as against global levels of 29. This reflects an
under-penetration of tractors in the Indian market.
Land holding size % of tractor ownership
<5 acres 1
5-20 acres 18
>20 acres 81
Source: Company
Tractor financing
Tractor sales highly 90-95% of tractors sales are on financing. Public sector banks due to their penetration in
dependent on financing the rural areas are the major provider of tractor financing. M&M through its subsidiary Mahindra
support...
and Mahindra Financial Services is the largest private sector player in the tractor financing.
It finances approximately 30-35% of M&M tractor sales. This financing support through
MMFSL provides an edge over the competition.
Consolidation in the Indian Tractor Industry
Over the last 5 years the The Indian tractor industry consists of approximately 10 players with M&M being the largest
tractor industry has single player. Till 2005 there were 6 major players namely M&M, Tractors & Farm Equipment
consolidated... (TAFE), Punjab Tractors (PTL), Escorts, Eicher and International Tractors (Sonalika). Each
manufacturer had its geographical strength and inorganic growth was the only method to
gain marketshare in a highly competitive market. TAFE was strong player in the southern
market while was relatively weaker in the lucrative northern markets. This led to acquisition
of Eicher tractor division in 2005 at a cost of Rs3bn. Further, TAFE’s inherent strength was
in the >30hp range while Eicher was more dominant in the sub 30hp range. With a
complimentary strength geographically as well as on product TAFE consolidated its position
as number two player in the market and closed on to M&M. In another round of consolidation
in the industry, M&M acquired PTL in 2007. With this acquisition M&M regained its lead
over TAFE. The top two tractor manufacturers in the country now have ~65% market-share
between themselves.
Exhibit 33 - Tractors Market Share FY04 Exhibit 34 - Tractors Market Share FY09
5% 4% 5% 5% 3%
6%
10%
9%
28%
13%
14%
41%
9%
13%
13% 22%
M & M group Punjab Tractors TAFE Group Eicher Escorts Sonalika John Deere New Holland Others
Source: TMA, Comapny
vineet.hetamasaria@pinc.co.in 21
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
Ancillary business in Farm Equipment Segment
Powerol
High growth business with Extending its field of operations from tractors and expertise in diesel engines, M&M in FY02
revenue of Rs10bn... entered the power genset business with its ‘Powerol’ brand. Currently M&M Powerol has
products in the low and medium duty range of 5kVA to 320kVA and is a major supplier to the
telecom industry. Over the last five years the rapid growth in the telecom infrastructure and
power shortage woes have fueled the demand for captive gensets in India. With a strong
brand name and about 55 exclusive branded showrooms across India, the Powerol business
has grown from a modest Rs500mn in FY05 to Rs10bn in FY09, an impressive 115% CAGR
growth.
Exhibit 35 - Mahindra Powerol Revenues Exhibit 36 - Mahindra Applitrac Revenues
Rev enues (Rs mn) (LHS) Grow th (%) (RHS) Rev enues (Rs mn) (LHS) Grow th (%) (RHS)
12,000 240 600 240
9,000 180 450 180
(%)
6,000 120
(%)
300 120
3,000 60 150 60
0 0 0 0
FY05 FY06 FY07 FY08 FY05 FY06 FY07 FY08
Source: Company
Indian Rural Economy
Characteristics of the Indian rural economy
65% of the Indian population The rural economy in India is predominantly agriculture dependent. With roughly 65 percent
living in the rural areas... of the India population living in the rural areas this represents a substantial portion of the
country. Although the share of agriculture in the total GDP has decreased from 24 percent
in 1999-00 to 17 percent in 2008-09, it still continues to have a large bearing on the state of
the national economy.
Agriculture and related activities are the major employment drivers for the rural economy.
Availability of cheap labour and fragmented land holdings has restrained the Indian farming
sector from adapting mechanization in a big way. However, tractors are becoming a part of
a farmer’s lifestyle due to its multi-functional utility. Besides helping the farmer in cultivation,
tractors are also used for carrying the farm output to market place. They are also used for
commuting purpose. For an Indian farmer, tractors are a symbol of his prestige in the
society. Tractors are also used by the farmers to generate income by giving them on hire.
The ‘Farm Credit Package’ was announced by the Government in Jun’04 to enhance the
flow of credit to the agriculture sector. Boosted by a strong growth in credit from the commercial
banks credit flow to the agriculture sector has grown at a CAGR of 25 percent over the
period FY04-09.
vineet.hetamasaria@pinc.co.in 22
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
Exhibit 37 - Credit Flow to Agriculture Sector (Rs bn)
Credit Flow to Agriculture Sector Grow th % (RHS)
3,000 60.0
2,250 45.0
1,500 30.0
750 15.0
0 0.0
FY04 FY05 FY06 FY07 FY08 FY09P
Source: India Economic Survey
Dependence on monsoons
Indian agriculture remains Indian agriculture remains dependent on monsoons despite progress on irrigation facilities.
dependent on monsoons... This is corroborated by the fact whenever monsoons have been insufficient; there has been
a decline in agricultural GDP. The impact is more on the Kharif season crop which is more
dependent on monsoons unlike Rabi crop which uses irrigation facilities. However, dependence
of Indian economy on agricultural GDP is coming down gradually and now contribution of
agricultural GDP to total GDP stands at 17%. This has reduced the monsoon impact on
economic growth.
Exhibit 38 - Monsoons - A big impact on agricultural GDP
Agricultural GDP % of LPA Rainfall
700,000 130
600,000
115
500,000
400,000
100
300,000
200,000
85
100,000
0 70
FY84
FY85
FY86
FY87
FY88
FY89
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
Source: Ministry of Agriculture, India Economic Survey
vineet.hetamasaria@pinc.co.in 23
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
Exhibit 39 - Reducing dependence on agricultural GDP
40.0
30.0
20.0
10.0
0.0
FY83
FY84
FY85
FY86
FY87
FY88
FY89
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
Source: www.mospi.nic.in
Reduction in dependence of agricultural GDP to food-grains cultivation
Foodgrain contribution to The contribution of agricultural GDP on food-grains production is also reducing. During
agriculture GDP is on a FY03 which was the last drought year, food-grain production was lower by 18% while
consistent decline... agriculture GDP contracted by 7%. In the following year, while food-grain production increased
by 22%, agricultural GDP expanded by 10%. This reflects the fact that our rural economy is
now much more diversified in its composition.
Exhibit 40 - Agricultural GDP less dependent on foodgrains
Kharif Rabi Grow th in Kharif Grow th in Rabi
240 35.0
180 20.0
120 5.0
60 (10.0)
0 (25.0)
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
Source: Ministry of Agriculture, India Economic Survey
Irrigation
Irrigation is a major prosperity driver for the rural economy. There has been a substantial
emphasis on irrigation in the five year plans implemented by the government. However there
is still scope for creation of irrigation potential and usage. India has an overall irrigation
potential of ~140mn hectares. As of 2007, the irrigation potential created was ~102mn
hectares while irrigation potential utilised is ~ 87mn translating into a utilization percentage
of just over 60 percent.
vineet.hetamasaria@pinc.co.in 24
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
North India has better The geographical spread of this utilization level is quite diverse. Northern states namely
irrigation facilities though Punjab, Haryana & Uttar Pradesh have an utilization level of over 75%. Punjab has the
South India is catching up in
highest irrigation utilization level of ~98%. In the Southern states, Tamil Nadu has the
the recent years...
highest irrigation penetration of 65%. Andhra Pradesh has created substantial irrigation
potential in the Xth Five Year Plan and current potential is around 60%. Madhya Pradesh
has the lowest irrigation potential created at ~20%.
Northern states with a higher irrigation availability and prosperity account for majority of the
domestic sales. In the 1998-99, the north accounted for ~55% of all the domestic sales
followed by West with 29%, while the South and East each accounted for 8% of the domestic
sales. During the FY99-FY08 period, the tremendous growth in irrigation in the southern
states helped drive tractor sales and as of FY08 the share of South has increased to 26%
while that of North has been reduced to 38%. In number terms while the industry grew at a
flat rate of 2% CAGR, the South India tractor market grew at a substantially higher 13.9%
CAGR while north India market contracted by 2% CAGR. The Western and Eastern region
has maintained their market-share at 27% and 9% respectively.
Minimum support price mechanism
MSP for major crops has The minimum support price (MSP) mechanism of the government is directed at providing
increased steeply in the last insurance to the farmers against any sharp fall in produce prices. The farmers are free to
two years... sell their produce in the open market or to the government agencies at the MSP. The MSP
thus establishes the base, further below which prices cannot fall. The government reviews
the MSP on a yearly basis.
The increase in MSP is one of the drivers of the rural economy. The profitability of farmers is
driven by the MSP and thus affects the expenditure potential. The MSP for the two major
crops paddy (common grade) and wheat has increased at a CAGR of 6.8% over the
1999-2009 decade. The last five years have however seen a higher growth of 9.1% CAGR for
paddy and 11.4% for wheat. The increase in MSP has been steep since 2006 with prices for
paddy in FY09 49.1% and that for wheat 66.2% higher than their FY06 levels. This had led
to improvement in profitability of the farmer and had a favorable impact on tractor sales from
the 247k units in FY05 to 342k units in FY09 i.e. a growth of 8.5% CAGR.
Exhibit 41 - Minimum support price (MSP) trend
Paddy (Common) Wheat
1,200
1,000
800
600
400
FY01 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Source: Ministry of Agriculture, India Economic Survey
vineet.hetamasaria@pinc.co.in 25
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
Productivity improvement is Area under cultivation and productivity
the prime reason behind
agriculture growth... The total area under foodgrain cultivation is stagnating at ~125 mn hectares. During the
period 1971-2009, area under cultivation has remained at ~123 mn hectares; however, output
of major food-grains has almost doubled. This reflects the productivity improvement in Indian
agriculture due to higher usage of modern tools of agriculture like tractors, fertilisers,
pesticides etc.
Exhibit 42 - Area under cultivation and Yield
Area Under Production (mn hectares) Yeild (kg/hectare)
130.0 2,000
125.0 1,500
120.0 1,000
115.0 500
110.0 0
FY67
FY69
FY71
FY73
FY75
FY77
FY79
FY81
FY83
FY85
FY87
FY89
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
Source: Ministry of Agriculture
Changes in Indian Farming
Advent of Contract farming
Contract farming taking its The agriculture landscape in India is undergoing change albeit at a slower pace. The major
shape in Indian agriculture change over the last 4-5 years has been an increasing penetration of organized retail in
sector...
India. Large corporates such as Reliance, Aditya Birla Group, RPG etc have expanded the
reach of retail in India. Before the advent of the retail giants the access for the farmer or
producer to the market was through the middlemen. These traders have traditionally exploited
the illiterate or under informed farmers. With the advent of retailers the middlemen have
been sidelined and thus improving realizations at the hands of farmers. Also with the advances
in technology, information is more readily available in the rural areas today.
There has also been a beginning made in terms of contract farming in India. A lot of corporates
are entering into agreement with farmers for contract farming. They provide seeds, technology
etc for maintaining the quality of products and also help farmers with working capital. This
helps the farmer in getting a committed price for his output before he starts farming. Although
this has not percolated to all states, experiments in a few states like Punjab, Haryana,
Maharashtra and Madhya Pradesh have been successful. We expect contract farming trend
to increase further in the coming years which will lead to higher levels of mechanization in
the farming.
Farm Mechanization in India
Mechanization at low level Mechanization of farming in India is still at a nascent stage. There are various reasons for
due to small land holding... the low penetration of farm equipment in the country. Small farm-holding size and scattered
holdings are the principal reasons for the low levels of mechanization in the country. Small
vineet.hetamasaria@pinc.co.in 26
RESEARCH
Mahindra & Mahindra
BUSINESS ANALYSIS
and marginal farmers continue to constitute 70 percent of the total farming population. Lack
of purchasing power further restricts the farmer from purchasing costly equipments.
Scarcity of labour to lead to However rising wage rates for labour and shortage of labour especially during the peak
higher level of sowing and harvesting season is making the case for mechanized equipment stronger. This
mechanization... problem has further aggravated in the recent years due to government schemes like National
Rural Employment Guarantee Scheme (NREGA) which ensures a minimum number of
days of work at a government fixed rate for rural population. This has been visible in state
like Punjab and Haryana which are dependent on migrant labours from Bihar for cultivation
jobs. However due to local job availability through NREGA, migration has reduced and this
is compelling farmers for to rely on mechanization for cultivation process.
M&M entered the mechanized farm equipment business as a natural extension to its tractor
business. Although the business is still in the nascent stage there is a tremendous potential
for growth in India. The company is currently concentrating on the labour intensive crops
such as sugarcane and paddy for developing new products.
Growth in Rural Infrastructure
Under the Pradhan Mantri Gram Sadak Yogana (PMGSY), the government embarked on an
ambitious plan to connect approximately 16mn unconnected habitations with all weather
roads. In the ongoing eleventh plan an investment requirement of Rs400bn is projected for
rural roads. In the first two years of the Eleventh plan an expenditure of Rs257bn has been
incurred under the PMGSY while an allocation of Rs120bn has been made for FY09-10.
This growth in roads alongwith a similar expansion in rural electrification is helping to improve
the standard of living in rural India.
This expenditure in rural India has also boosted construction activity, which has further
provided employment in the rural areas as well as requirement of tractors and trailers to
assist in the construction activity.
vineet.hetamasaria@pinc.co.in 27
RESEARCH
Mahindra & Mahindra
INTERNATIONAL OPERATIONS
International Operations
Farm Equipment segment
USA is the major export M&M has spread its footprint across the globe and M&M branded tractors are available
market for M&M tractors... across six continents spanning more than 25 countries. Along with the Indian sub-continent,
M&M has entered in the US, Australia, Europe and African markets. Through its Indian
operations, M&M is exporting finished tractors as well as CKDs across the globe. Tractor
exports declined 25.8% in FY09 due to slump in demand in mainly the US markets. We
expect the down trend to continue further in FY10 with exports declining 25% to 5k units.
Exhibit 43 - M&M Tractor Exports
Ex ports Grow th % (RHS)
10,000 40.0
7,500 20.0
5,000 0.0
2,500 (20.0)
0 (40.0)
FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E
Source: Company, PINC Research
In the US, Mahindra USA (MUSA) has established 3 assembly plants in the states of
Texas, Georgia and California. With its compact and utility range (35 series) of tractors,
MUSA mainly targets hobby and recreational farmers. The economic crisis in FY09 led to a
sharp fall in the US tractor sales decreasing 31% to 6,450 units and a net income of
USD100mn. The company had maintained a run rate of 10k units over the FY06 to FY08
period.
Like the US, Mahindra Australia is also primarily focused on the compact (20-30 HP range)
and utility (45-80 HP range) range of tractors through its assembly operations in Brisbane.
In Africa, M&M has established assembly plants in Ghana, The Gambia and Nigeria while
establishing a presence across 14 countries in the African continent.
China Operations
In China, M&M has two China alongwith India and US comprise the top three tractor markets in the world. M&M
tractor JVs... forayed into the Chinese tractor market in Jul’05 with a joint venture with Jiangling Motors
Co, China. M&M holds 80% stake in the joint venture with remaining held by Jiangling
Motors. The JV christened Mahindra (China) Tractor Company Limited (MCTCL) started
operations with tractors branded ‘Fengshou’ and an annual capacity of 12k units in the 18-
33hp range. The sales for the company have grown from 2,718 units in FY06 to 5,417 units
and revenue of Rs913mn in FY09.
vineet.hetamasaria@pinc.co.in 28
RESEARCH
Mahindra & Mahindra
INTERNATIONAL OPERATIONS
In a further consolidation move in the Chinese market, in Aug’08 M&M formed its second JV
in China with Jiangsu Yueda Yancheng Tractor Manufacturing Co. named as Mahindra
Yueda Yancheng Tractor Company (MYYTCL). M&M has a 51% stake in the joint venture
with an investment to the tune of USD26mn through its Mauritius based investment arm.
The Jinma tractor brand of Yancheng is the 4th largest tractor brand in China. The tractor
related assets of Yancheng motors estimated at USD50mn were transferred to the JV. The
company is a strong player in the higher power tractor segment with models upto 125hp.
The total capacity of the unit is approximately 48k units per annum.
Exhibit 44 - Mahindra USA Sales Exhibit 45 - Mahindra China (MCTCL) Sales
Mahindra USA Grow th % (RHS)
Mahindra China (MCTCL) Grow th % (RHS)
12,000 40.0 6,000 40.0
9,000 20.0 4,500 30.0
6,000 0.0 3,000 20.0
3,000 (20.0) 1,500 10.0
0 (40.0) 0 0.0
FY05 FY06 FY07 FY08 FY09 FY06 FY07 FY08 FY09
Source: Company
vineet.hetamasaria@pinc.co.in 29
RESEARCH
Mahindra & Mahindra
INTERNATIONAL OPERATIONS
Automobile Segment
To commence exports to M&M started first as an assembler for Willys, USA jeeps in the pre independence era. In the
USA in Q4FY10... 1960s M&M started its first exports with the jeeps to the Yugoslavian market. Since then
M&M has expanded its geography across the globe starting with the African markets like
Nigeria, Kenya in the 70s. Today M&M has a presence in 15 countries in the African continent
including a CKD (Completely Knocked Down) operation in Egypt and operations in South
Africa through a subsidiary.
In the Indian sub-continent M&M has significant presence in the neighboring countries like
Nepal, Sri Lanka, Bhutan. Established in 2005, Mahindra Europe marked M&M’s entry to
Europe with the launch of Scorpio in Italy christened as Mahindra Goa. Following Italy,
M&M took the Goa to France and Spain as well.
In South America, M&M has established a SKD (semi Knocked Down) facility in Uruguay
(2004) and Brazil (2008) for the manufacture of the Scorpio SUV and Bolero Pik-up (named
Cimarron) range. The company plans to foray into the US with its pick-up range following its
presence in the farm equipment business.
During the FY03-08 period, M&M exports surged at a CAGR of 63% from just about 1k units
in FY03 to 12k units in FY08. FY08 was the peak and since then export volumes have
slumped largely owing to the global financial crisis. FY09 exports dropped 31% to 8.5k
units. We expect export volumes to pick up in H2FY10. However for the whole year FY10
we expect volumes to remain at the FY09 levels.
Exhibit 46 - M&M Automobile Exports
Auto Ex ports Grow th % (RHS)
16,000 120.0
12,000 80.0
8,000 40.0
4,000 0.0
0 (40.0)
FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E
Source: Company
vineet.hetamasaria@pinc.co.in 30
RESEARCH
Mahindra & Mahindra
SUBSIDIARIES
Subsidiaries
Systech (Auto Components segment)
Adopted inorganic growth The Systech division of the company was established in 2004 to capitalize on the growth
strategy... potential in the auto components business. For the purpose, this division has adopted
inorganic growth strategy in both domestic and overseas market. The aspiration of M&M
was to create a business with turnover of a billion US dollars with a market capitalization of
similar amount by 2010. The division is on course to achieve its turnover targets; however
profitability is under strain due to demand destruction in the developed markets.
Forging is the major revenue driver for the division with a contribution of over 50% of the
revenue. Besides forging, Systech has manufacturing units for metal stampings, castings
and gears. The stampings and steel business generates 25% of the revenue.
Exhibit 47 - Systech Corporate Structure
SYSTECH
Forgings Steel & Castings & Engineering
Gears Others
stampings Ferrites Services
Mahindra
Mahindra Mahindra Mahindra Metal Castello Engineering
Forgins Ugine Steel Castings Services
Mahindra Mahindra
Mahindra SAR Engineering
Schoneweiss Hindoay Transmission Services
Industries
(Europe)
Mahindra
Jeco
Technologies
Engines
Stokes Group Engineering
Source: Company, PINC Research
vineet.hetamasaria@pinc.co.in 31
RESEARCH
Mahindra & Mahindra
SUBSIDIARIES
Exhibit 48 - Systech Revenue Productwise Exhibit 49 - Systech Revenue Grographywise
Steel & Stampings
25% India
42% Italy
Castings & Ferrites 11%
6%
Gears
10%
Engineering Services
5%
Others
1%
Forgings Germany
53% 47%
Source: Company
Inorganic Growth Strategy
Forging capacity of Identifying the potential in the automobile forging segment especially in exports, M&M
300k tpa... entered the segment with the acquisition of Amforge’s Chakan (Pune) unit with a forging
capacity of 42k tpa. Amforge was a key supplier to MM’s auto division along with a host of
other key OEM manufacturers.
In a bid to increase its foot print across the globe and to get an entry into Europe, Mahindra
Forging made three major acquisitions within a period of just over a year. Two of these
acquisitions were in Germany with one in England. Currently MFL is one of the top five
forging companies in the world with an estimated combined capacity in excess of 300k tpa
and FY09 turnover of Rs22.4bn.
Acquisition in England
The first overseas acquisition was when MFL acquired 98.6 percent stake in Stokes Group
Ltd in May’06. Stokes, the largest automotive forgings company in England, had an installed
capacity of 36k tpa and a topline of GBP25mn. The company has three manufacturing units
in the Midlands of England. In FY09, due to the economic slowdown severely affecting the
automobile sector, the company decided to restructure the business. Consequently out of
the three plants, MFL has decided to shut the Walsall facility and relocate the machinery
and other manufacturing facility to sites in Dudley and Brierley Hill.
Acquisition in Germany
Following the English acquisition, MFL acquired 67.9% stake in Germany based Jeco
Holdings. At the time of acquisition, JECO had a combined capacity of 100k tpa spread over
its four manufacturing units in Germany. With a turnover of Euro180mn in CY05, Jeco was
one of the top five forging companies in Germany.
Close on the heels of the its first German acquisition, MFL acquired 90.47% stake in
Schoneweiss & Co. With a forging capacity of 50k tpa over 3 plants and turnover of Euro90m,
Schoneweiss is a leading automobile parts supplier in Germany. It specializes in suspension,
power-train, engine parts etc and is one of the top five axle beam manufacturers in the
world.
vineet.hetamasaria@pinc.co.in 32
RESEARCH
Mahindra & Mahindra
SUBSIDIARIES
Major acquisition done by Systech
Exhibit 50 - Major Acquisitions done by Systech
Target Acquired Location Date Stake Capacity
Key Customers Revenues Comments
Acquired (in TPA)
M&M, International FY09 turnover Acquired 51% stake in
Tractors, New Holland, of Rs737mn the Rajkot based gear
SAR Transmission India Jan-05 51.0 -
TVS, Eaton USA, manufacturer for
Metalcastello Rs146mn
M&M, Tata Motors, Maruti FY07 turnover Acquired Chakan plant
Suzuki, Ashok Leyland, of INR2.17bn of Amforge
Amforge India Apr-05 100.0 42,000
Kirloskar Oil Engines,
Escorts
Operations in Aisa,
Germany, UK and USA.
Plexion Technologies India Dec-05 88.4 - - -
Focused on Aerospace
& Automotive
Engineering
Koyo Bearings, Land FY07 turnover UK's largest automotive
Rover, ZF, Bosch, of GBP25mn forging group with 3
Stokes England Jan-06 98.6 36,000
Visteon, Ford, Jaguar plants
DaimlerChrysler Group, FY07 turnover Focused on commercial
ZF, MAN, Volvo, Linde, of Euro193mn vehicles segment
Jeco Germany Sep-06 67.9 100,000
Renault, Agco, Kessler,
Kolbenschmidt
FY07 turnover JV with Hitachi Metals
- of Rs2.5 bn Japan manufactures
DGP Hinoday Industries India Nov-06 66.0 24,000
castings & ferrites
DaimlerChrysler Group, FY07 turnover With 3 manufacturing
MAN, Scania, of Euro92mn facilities, specialises in
Schoneweiss Germany Jan-07 90.5 50,000
Volkswagen suspension, power train
& engine parts
FY08 Trunover Independent gear
of US$100 mn manufacturer in Europe
Metalcastello Italy Apr-08 100.0* - -
catering to off-highway
segment, tractors and
construction equipment
Benelli, Beta, Ducati, FY08 turnover Two wheelers design
Gilera, Honda, LEM, of US$12 mn and developing of
Engines Engineering Italy Jun-08 100.0 -
Malaguti, Yahama. motorcycle prototype
Source: Company
Systech - Financial performance
(Rs mn) FY07 FY08 FY09
Revenues 17,400 36,550 41,310
EBIDTA 2,096 3,910 2,960
EBIT 1,657 2,048 212
Source: Company
vineet.hetamasaria@pinc.co.in 33
RESEARCH
Mahindra & Mahindra
SUBSIDIARIES
AUM CAGR of 30% over last Mahindra & Mahindra Financial Services Limited (MMFSL)
five years...
MMFSL, the financing arm of MM, is a non banking finance company (NBFC) predominantly
focused on the semi urban areas. With over 400 branches all over India MMFSL has a
widespread presence in India and piggybacks on Mahindra’s brand recall and spread.
Over the last five years MMFSL’s assets under management (AUM) has grown at a CAGR
of 30 percent to Rs74bn. Automotive segment and tractors mainly constitute MMFSL’s
portfolio. While utility vehicles accounts for 38 percent, tractors constitute 25 percent while
cars account for 24 percent of the portfolio.
After ~175k incremental contracts in FY07 and FY08, new contract acquisition declined 10
percent to 157k contracts on back of the slowdown in the economy especially in the sales
of utility vehicles.
Exhibit 51 - Growth in AUM Exhibit 52 - AUM Breakup FY09
AUM (Rs bn) Grow th % (RHS)
Tractors
80 80 25%
Cars
24%
60 60
40 40
Commercial Vehicles
7%
20 20
Refinance & Others
0 0
Auto/Utility Vehicles 6%
FY05 FY06 FY07 FY08 FY09 38%
Exhibit 53 - Incremental Customer Contracts Exhibit 54 - Total Income
200 16,000
150 12,000
100 8,000
50 4,000
0 0
FY05 FY06 FY07 FY08 FY09 FY05 FY06 FY07 FY08 FY09
Source: Company
Systech - Financial performance
Rs mn FY07 FY08 FY09 FY10E FY11E
Revenues 8,446 12,268 13,846 9,668 9,911
Net Income 1,329 1,770 2,145 2,459 2,724
Source: Company, PINC Research
vineet.hetamasaria@pinc.co.in 34
RESEARCH
Mahindra & Mahindra
SUBSIDIARIES
Infrastructure Development Sector
M&M’s presence in infrastructure development is broadly divided into three segments:
Hospitality
Real Estate Development – commercial and residential
Infrastructure maintenance services
Exhibit 55 - Infrastructure Develop[ment Swctor Structure
Infrastructure Development Sector
Mahindra Holiday and Resorts Mahindra Lifespace Developers
Commercial and residential Real Estate
Ownership of holiday resorts, time-sharing
Development SEZ development, SEZ
holidays
operators, Utilities services operator
Source: Company, PINC Research
Mahindra Holidays and Resorts (MHIL)
Time sharing holiday MHIL is the hospitality arm of the group and is involved in the business of vacation ownership
business... on time-sharing basis. The company has 28 resorts located in India and Thailand. Beside
this, it has tie-up with RCI which entitles MHIL members to access 4,192 RCI affiliated
resorts across the world.
High growth business
MHIL has reported high growth in its business with membership CAGR of 35% over
FY04-09. In the same time frame, its revenues and EBIDTA had a CAGR of 42% and 59%
respectively.
Exhibit 56 - Time sharing gaining traction Exhibit 57 - High growth business
Memberships Grow th % (LHS) Rev enues (Rs mn) Grow th % (LHS)
100,000 60 8,000 80
75,000 45 6,000 60
50,000 30 4,000 40
25,000 15 2,000 20
0 0 0 0
FY05 FY06 FY07 FY08 FY09 FY05 FY06 FY07 FY08 FY09
Source: Company
vineet.hetamasaria@pinc.co.in 35
RESEARCH
Mahindra & Mahindra
SUBSIDIARIES
Financial
Multifaceted revenue stream
MHIL has developed a business model which is a combination of annuity and recurring
income. In a typical membership scheme, it has large upfront cash inflows. This is followed
by recurring income like interest income, annual subscription fees, resort revenues etc.
Exhibit 58 - Rev. stream is a healthy mix of upfront fees and recurring income
Source: Company
Exhibit 59 - EBIDTA trend Exhibit 60 - Profit trend
EBIDTA (Rs mn) Grow th % (LHS) Net Profit (Rs mn) Grow th % (LHS)
2,000 100 1,000 180
1,500 75 750 130
1,000 50 500 80
500 25 250 30
0 0 0 (20)
FY05 FY06 FY07 FY08 FY09 FY05 FY06 FY07 FY08 FY09
Source: Company
vineet.hetamasaria@pinc.co.in 36
RESEARCH
Mahindra & Mahindra
SUBSIDIARIES
Mahindra Lifespace Developers
Mahindra Lifespace Developers (MLDL), the real estate arm of the group is involved in the
business of residential and commercial real estate. It is the pioneer in the Indian Special
Economic Zone segment and developed India’s first special economic zone (SEZ) in the
private sector at Chennai.
Public-Private partnership (PPP model) for SEZ
All SEZ of the company are in partnership with the state government agencies and this has
helped the company in expediting the land acquisition and regulatory approval processes.
Its Chennai SEZ has created a strong brand image for the company and existing tenant at
Chennai facility recommended the company for a new SEZ at Jaipur.
Asset light model
Unlike its peers in the real estate business which went out on land acquisition spree at
crazy valuations, MLDL has been very conservative. Most of its land holding have been
acquired at low cost and this reduces the risk associated with the project. This has further
helped the company in keeping its balance sheet insulated from credit crunch faced by the
industry during FY09.
Exhibit 61 - Revenue Growth Exhibit 62 - EBIDTA Trend
Rev enues (Rs mn) Grow th % (LHS) EBIDTA (Rs mn) Grow th % (LHS)
4,000 70 1,200 180
3,000 50 900 130
2,000 30 600 80
1,000 10 300 30
0 (10) 0 (20)
FY05 FY06 FY07 FY08 FY09 FY05 FY06 FY07 FY08 FY09
Source: Company, PINC Research
Financials
FY07 FY08 FY09 FY10E FY11E
Revenues (Rs mn) 2,240 2,650 3,710 3,826 5,620
EBIDTA (Rs mn) 380 990 1,020 1,114 1,666
Net Profit (Rs mn) 190 660 660 727 1,236
Source: Company, PINC Research
vineet.hetamasaria@pinc.co.in 37
RESEARCH
Mahindra & Mahindra
SUBSIDIARIES
Tech Mahindra
Leading provider of IT Tech Mahindra is a leading provider of IT solutions and services to the global
solutions in the Telecom telecommunications industry. It was formed in 1986 as a joint venture between Mahindra &
Space... Mahindra Ltd and British telecommunications. It mainly caters to the telecom vertical and
has increased presence in the European market. The company recently acquired Satyam
Computer services in March 2009. This acquisition will help them in winning large clients
across various other verticals like BFSI, retail and manufacturing
Telecom Industry adopts the cost efficiency route
In the current economic slowdown, the large telecom players which have been adversely
affected are searching for various options to curtail costs. This would enhance the demand
for outsourcing of various activities that would benefit Tech Mahindra which is a niche player
in this segment. The telecom service providers are in a process to transform their systems,
processes and networks which will provide them the required competitive edge. The worldwide
IT spending by the communication vertical is expected to reach USD427bn in 2012 from
USD368bn in the current year.
Exhibit 63 - Tech Mahindra Headcount Exhibit 64 - Revenues
32,000 60
24,000 45
(Rs bn)
16,000 30
8,000 15
0 0
FY05 FY06 FY07 FY08 FY09 FY05 FY06 FY07 FY08 FY09
Source: Company
The acquisition of Satyam Computers – A Thumbs up
Acquired Satyam Computer After the take over, Satyam is in the midst of a transformation phase which will help Tech
recently... Mahindra to reap benefits in the long term. There has been a complete shift in the Satyam
management and this will enable the company to get the business on track. There have
been some concerns regarding the ability of Satyam to maintain all its clients but the
management has been confident that the client attrition faced by Satyam was negligible
and it was even able to maintain its billing rates in the previous quarter. The financials of
Satyam computers are currently being rebased and will be published by Dec 2009 which
will give a clear picture about the company’s status. We believe that in the medium term
Tech Mahindra and Satyam will emerge as a merged entity and Tech Mahindra would be a
bigger benefactor of this merger.
Strong operating cash flows – Prove the strength of the business model
The company has been able to generate a strong operating cash flow of Rs12.2bn in FY09
which was primarily due to higher profits and a major dip in the requirement of working
capital.
vineet.hetamasaria@pinc.co.in 38
RESEARCH
Mahindra & Mahindra
SUBSIDIARIES
Exhibit 65 - Profitability Trend Exhibit 66 - Geographical Split of Revenues
Net Profit (Rs bn) OPM (%) NPM (%)
12 30
Others
8%
9 25
6 20
Europe
67%
3 15
North America
25%
0 10
FY05 FY06 FY07 FY08 FY09
Source: Company
Financials
FY05 FY06 FY07 FY08 FY09
Headcount (nos) 5,617 10,493 19,749 22,884 24,972
Sales (Rs bn) 9.4 12.4 29.2 37.6 44.6
Op. Profit (Rs bn) 1.3 2.7 7.2 8.2 12.8
Net Profits (Rs bn) 1.0 2.3 6.1 7.7 10.1
Source: Company
vineet.hetamasaria@pinc.co.in 39
RESEARCH
Mahindra & Mahindra
FINANCIALS
Financials
Revenues
Tractor sales to increase by Net revenues are likely to have a CAGR of 13% over FY09-11E. During FY10, FES revenue
13% during FY10... will be boosted due to full impact of merger of PTL with the company. This merger was done
w.e.f. August 2008. We expect vehicles and tractor sales to grow by 10% and 8% during
FY10 and FY11 respectively. Tractor sales are likely to grow by 13% during the current year
while FY11 growth will taper off to 3%. Next year tractor growth is expected to be down due
to lag impact of dismal monsoon during the current year. In the automotive segment, UVs
will remain the mainstay of the company with growth of 11% and 9% respectively. Beside
this, other business like engines, diesel gensets etc will contribute incremental revenue.
Exhibit 67 - Net Sales (Standalone)
Net sales (LHS) Grow th % (RHS)
200 40
150 30
Rs bn
100 20
50 10
0 0
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E
Source: Company, PINC Research
Operating Profit
Margin to expand to 13% Profitability of the company was adversely impacted by high raw material cost and losses
during FY10... on foreign currency derivatives during FY09. For the first time in the last seven years,
EBIDTA margins contracted by 360bps during FY09. However, in recent months, commodity
prices have corrected from their peak levels. This is having a favorable impact on the
profitability of the company. After the disappointment of previous year, we expect EBIDTA to
increase by 81% with margins of 13% during FY10. We expect margins to stabilize at
these levels.
Exhibit 68 - EBIDTA (Standalone)
EBIDTA (LHS) Grow th % (RHS) EBIDTA margin % (RHS)
25 90
20
60
15
Rs bn
30
10
0
5
0 (30)
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E
Source: Company, PINC Research
vineet.hetamasaria@pinc.co.in 40
RESEARCH
Mahindra & Mahindra
FINANCIALS
Profit and earnings
PAT growth of 69% in
During FY04-08, profits for the company had a CAGR of over 30%, however performance
FY10...
during FY09 was adversely impacted due to reasons discussed earlier. With sharp
improvement in profitability expected in the current year, M&M will be able to compensate
for the disappointment witnessed in FY09. Adjusted PAT for the year is likely to grow by
69% to Rs14bn. During the current year, we expect equity dilution of 3.4% on conversion of
compulsorily convertible debentures, thus leading to earnings growth of 56%. We expect
further equity dilution of 3.2% during FY11 on conversion of FCCBs.
Exhibit 69 - Net Profits (Standalone) Exhibit 70 - EPS (Standalone)
Adj. Profit (LHS) Grow th % (RHS) Adj. Earnings (LHS) Grow th % (RHS)
20 275 60 300
15 200 45 200
Rs bn
10 125 30 100
Rs
5 50 15 0
0 (25) 0 (100)
FY10E
FY11E
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10E
FY11E
FY03
FY04
FY05
FY06
FY07
FY08
FY09
Source: Company, PINC Research
Low leverage
Currently the net debt equity ratio on the standalone balance sheet is 0.5x. We expect this
to further improve to 0.4x with conversion of debt into equity during FY10-11. We see the
current gross debt of Rs40bn as the peak debt level given the growth plans of the company.
Gross debt to peak at the
During FY10, debentures of Rs7bn will be converted into equity at a conversion price of
current levels...
Rs745 per share. During FY11, FCCBs of USD195mn is due for redemption. We see high
probability of these FCCBs getting converted in equity and hence taken it in diluted equity
for FY11.
Exhibit 71 - Debt (Standalone)
Gross Debt (Rs bn) Net debt equity (x )
60 0.8
45 0.6
Rs bn
30 0.4
15 0.2
0 0.0
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E
Source: Company, PINC Research
vineet.hetamasaria@pinc.co.in 41
RESEARCH
Mahindra & Mahindra
FINANCIALS
Satisfactory return ratios during investment phase
Return ratios adversely M&M has been in a growth phase entailing huge investments in capacity expansion and
impacted due to capex and subsidiaries. Despite this, it has maintained a satisfactory RoE and RoCE. Over the
investment in subsidiaries... last two years, the company has been in an aggressive capex phase across all its business
segments. This is having an adverse impact on the return ratios in the near term,
however, we believe that once these capex becomes productive, the return ratios will move
towards 25%.
Exhibit 71 - Debt (Standalone)
Total Debt Net debt/Equity (x )
60 0.60
45 0.45
Rs bn
30 0.30
15 0.15
0 0.00
FY05 FY06 FY07 FY08 FY09 FY10E FY11E
Source: Company, PINC Research
Equity dilution
Equity dilution over two years We don’t expect equity dilution in the company except for conversion of existing debentures
due to conversion of and FCCBs. Even in case the company requires fund, it can do so by monetizing the
debentures and FCCBs... treasury stocks being held through trusts. These treasury stocks were created on merger of
subsidiaries Mahindra Holding & Finance Ltd and Punjab Tractors Ltd during FY09. The
total treasury stock with the company represents 9.3% of the existing equity and is worth
~Rs20bn at the current market price.
vineet.hetamasaria@pinc.co.in 42
RESEARCH
Mahindra & Mahindra
Year Ended March (Figures in Rs mn)
Incom e Statement FY07 FY08 FY09 FY10E FY11E Cash Flow Statement FY07 FY08 FY09 FY10E FY11E
Net sales 96,277 108,046 126,491 145,416 160,677 Pre-tax profit 14,086 14,068 10,650 17,478 19,105
Growth (%) 20.5 12.2 17.1 15.0 10.5 Depreciation 1,289 2,026 4,846 3,836 4,706
Operating profit 8,447 6,391 6,476 14,916 16,707 Total tax paid (4,494) (2,788) (3,295) 1,038 (3,468)
Other operating income 3,509 7,366 4,446 4,823 5,061 Chg in w orking capital 3,754 195 9,185 (11,418) 272
EBITDA 11,956 13,758 10,923 19,738 21,768 Other operating activ ities (192) - - - -
Growth (%) 30.8 15.1 (20.6) 80.7 10.3 Cash flow from oper. (a) 14,442 13,500 21,386 10,935 20,615
Depreciation (2,099) (2,393) (2,915) (3,836) (4,706) Capital ex penditure (4,456) (6,923) (13,380) (10,303) (10,770)
Other income 3,498 1,926 3,596 3,576 4,043 Chg in inv estments (5,684) (19,776) (15,714) (6,695) (15,000)
EBIT 13,355 13,292 11,603 19,478 21,105 Other inv esting activ ities - - - - -
Interest paid (198) (876) (1,341) (2,000) (2,000) Cash flow from inv. (b) (10,139) (26,699) (29,094) (16,998) (25,770)
PBT (before E/o items) 13,157 12,416 10,262 17,478 19,105 Free cash flow (a+b) 4,303 (13,199) (7,708) (6,063) (5,155)
Tax prov ision (3,210) (3,034) (1,975) (3,496) (3,821) Equity raised/(repaid) (70) 325 (132) 6,975 3,165
E/o Income / (loss) 929 1,652 388 - - Debt raised/(repaid) 7,526 9,511 14,657 124 (3,615)
Net profit 10,876 11,034 8,675 13,982 15,284 Chg in Minorities int. - - - - -
Adjusted net profit 9,947 9,382 8,287 13,982 15,284 Div idend (incl. tax ) (4,880) (1,149) (3,211) (3,121) (3,959)
Growth (%) 47.7 (5.7) (11.7) 68.7 9.3 Other financing activ ities (921) (137) - - -
Diluted EPS (Rs) 42.2 39.3 32.4 50.4 53.3 Cash flow from fin. (c) 1,655 8,551 11,314 3,978 (4,409)
Diluted EPS Growth (%) 45.8 (6.8) (17.6) 55.7 5.7 Net chg in cash (a+b+c) 5,958 (4,648) 3,605 (2,085) (9,564)
Balance Sheet FY07 FY08 FY09 FY10E FY11E Key Ratios FY07 FY08 FY09 FY10E FY11E
Equity capital 2,412 2,431 2,792 2,860 2,957 OPM (%) 12.0 11.9 8.3 13.1 13.1
Reserves & surplus 33,117 41,070 49,829 66,758 81,017 Net margin (%) 10.3 8.7 6.6 9.6 9.5
Shareholders' funds 35,354 43,365 52,314 69,312 83,667 Div idend y ield (%) 1.5 1.5 1.3 1.5 1.5
Preference Share Capital - - - - - Net debt/Equity (x ) 0.1 0.4 0.5 0.4 0.4
Total Debt 16,360 25,871 40,528 40,652 37,037 Net Working Capital (day s) (21) (12) (44) (13) (14)
Capital Employed 51,714 69,236 92,842 109,964 120,703 Asset turnov er (x ) 1.4 1.2 1.0 1.0 1.0
Net fix ed assets 18,712 23,609 32,143 38,610 44,674 ROCE (%) 28.6 21.3 13.8 18.5 17.6
Cash & Cash Eq. 13,261 8,612 15,744 13,659 4,095 RoE (%) 31.0 23.8 17.3 23.0 20.0
Net other Current Assets (2,435) (4,569) (13,093) (3,912) (4,318) EV/Net sales (x ) 2.3 2.2 1.9 1.7 1.6
Inv estments 22,375 42,151 57,864 64,559 79,559 EV/EBITDA (x ) 18.8 17.4 22.6 12.6 11.7
Net Deferred Tax Assets (198) (567) 183 (2,952) (3,306) PER (x ) 19.3 20.7 25.1 16.1 15.3
Total assets 51,714 69,236 92,842 109,964 120,703 Price/Book (x ) 5.4 4.5 4.0 3.3 2.8
P/E Band EV/EBITDA Band
1,200 320,000
22X 15X
900 18X
240,000 12X
14X
9X
600 160,000
10X
6X
300 6X 80,000
3X
0 0
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abhinavb@pinc.co.in
RESEARCH
T E A M
EQUITY DESK
Gealgeo V. Alankara Head - Institutional Sales alankara@pinc.co.in 91-22-6618 6466
Sailav Kaji Head Derivatives & Strategist sailavk@pinc.co.in 91-22-6618 6344
SALES
Anil Chaurasia anil.chaurasia@pinc.co.in 91-22-6618 6483
Alok Doshi adoshi@pinc.co.in 91-22-6618 6484
Sundeep Bhat sundeepb@pinc.co.in 91-22-6618 6486
Gagan Borana gagan.borana@pinc.co.in 91-22-6618 6485
DEALING
Amar Margaje amar.margaje@pinc.co.in 91-22-6618 6327
Ashok Savla ashok.savla@pinc.co.in 91-22-6618 6400
Raju Bhavsar rajub@pinc.co.in 91-22-6618 6301
Manoj Parmar manojp@pinc.co.in 91-22-6618 6326
Hasmukh D. Prajapati hasmukhp@pinc.co.in 91-22-6618 6325
Pratiksha Shah pratikshas@pinc.co.in 91-22-6618 6329
DIRECTORS
Gaurang Gandhi gaurangg@pinc.co.in 91-22-6618 6400
Hemang Gandhi hemangg@pinc.co.in 91-22-6618 6400
Ketan Gandhi ketang@pinc.co.in 91-22-6618 6400
COMPLIANCE
Rakesh Bhatia Head Compliance rakeshb@pinc.co.in 91-22-6618 6400
Infinity.com
Financial Securities Ltd
bright thinking SMALL WORLD, INFINITE OPPORTUNITIES
Member : Bombay Stock Exchange & National Stock Exchange of India Ltd. : Sebi Reg No: INB 010989331. Clearing No : 211
1216, Maker Chambers V, Nariman Point, Mumbai - 400 021; Tel.: 91-22-66186633/6400 Fax : 91-22-22049195
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